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Netflix, Twitter fall as Nasdaq plunges below 4,000

Tech sell-off raises concerns over larger stock market correction.

Traders work on the floor of the New York Stock Exchange on Friday. Technology and biotech stocks fell a day after the worst rout for the Nasdaq composite index since 2011. (Richard Drew/The Associated Press)

As a sharp sell-off in tech shares continues, experts are debating whether the sector is headed for a major correction.

“It’s not a very good time right now to buy stock,” said Swiss investor and Gloom Boom & Doom Report newsletter publisher Marc Faber.

He sees an ‘‘ ‘87-type crash” or even worse some time over the next 12 months, due largely to excessive valuations of Internet, social media and biotech shares.

Faber made the comments after the Nasdaq biotechnology index endured a 5.6 per cent drop in value Thursday amid a pullback in the broader tech sector that began on the Nasdaq and has spread to Asia and other markets. The tech-heavy Nasdaq extended its losses Friday, falling another 1.34 per cent to close below 4,000 for the first time in more than month, and is on track for a nearly 5 per cent five-day decline.

The tech drop has been led by some of last year’s top tech performers. Netflix Inc., for instance, nearly quadrupled in value last year to top the charts of the bellwether Standard & Poor’s 500 index. The company was worth $27 billion (U.S.) by the time its stock peaked at $458 early last month. At that price, investors were paying the equivalent of $117 for every $1 of Netflix’s projected earnings. Investors were betting Netflix will become increasingly prosperous as the number of U.S. subscribers to its $8-per-month video steaming services swells from 33 million at the end of last year to management’s long-term hopes for 90 million.

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Even Netflix CEO Reed Hastings cited the “euphoria” surrounding the stock as he discussed the company’s quarterly earnings last October. “We have a sense of momentum, investors driving the stock price more than we might normally,” Hastings said in a video presentation. “There’s not a lot we can do about it.”

Another mind-boggling run-up occurred after online short messaging service Twitter Inc. priced its initial public offering at $26 per share in November. By late last year, Twitter’s stock had more than doubled to a peak of $74.73. At that level, Twitter boasted a market value of roughly $50 billion, even though the San Francisco company has never turned a profit in its eight-year history. The stock lost nearly half its value as tumbled down to about $40. That that still leaves Twitter with a market value of about $28 billion.

The tech sell-off has prompted value investor Carl Icahn to forecast a broader stock market pullback, though he says the correction could happen “in three years or in three days.”

Others, however, say economic fundamentals in the U.S. will stave off a crash — at least until the U.S. Fed boosts interest rights and fully unwinds its stimulus spending. “There hasn’t been a dramatic change in the fundamentals to trigger these recent declines,” Gail Dudack, chief investment strategist at Dudack Research Group, said in a research note.

There is also a view that some softening in tech and biotech stock valuations could trim excess to forestall a more severe drop.

“There are some areas of the market, and those are the poster children, where one would have to be concerned about valuations,” said Paul Taylor, chief investment officer of fundamental Canadian equities at BMO Global Asset Management. “And so it is healthy to see those areas which have been most frothy, if you will, to see them reacting a little more rationally.”

“We would be more apt to change this outlook if we saw signs of either fundamental deterioration in the economy or indications that Fed policy was negatively impacting markets,” Golub said in a note. “Neither of these conditions are present, in our view.”

Peter Cardillo, chief market economist at Rockwell Global Capital, however, said the Nasdaq slide is just the beginning.

“What happened (Thursday) is the start of a correction, an earnings-driven correction,” he said. While first-quarter earnings won’t be “overly terrible,” he said results will be worse than prior quarters.

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